Going about it the wrong way....?

[rroodd]

hi all,
been investing in property for a few years now, but am still VERY green at how it all works, in relation to loan structures, gearing ,etc...

And reading through these (very helpful !) forum threads over the past few months, I'm beginning to think i'm going about it (somewhat..), the wrong way...

I would dearly love to hear the opionions/advice of some of you seasoned, and much more experienced investors out there.

Here's my situation -
I'm in my early 30's, this is my portfolio thus far -

PPOR - own outright - value = $300k
IP#1 - owe $105K - value = $380k (rents at $300/wk)
IP#2 - owe $120k - value = $270k (rents at $250/wk)
IP#3 - owe $120k - value = $250k (rents at $220/wk)
IP#4 - owe $200k - value = $220k (rents at $250/wk) just purchased

You see, I have been paying off the loans (always) at P&I, thinking the best idea was to try and own them as soon as possible, not realizing that perhaps I should be going Interest Only, and freeing up cash to buy more..?..?

I am technically 'ahead' on my actual loan payments, by approx. $85k, and my bank manager suggested refinancing and using that to put towards paying off IP#1 completely, which i could then own outright within 12 months.
Then there would be $300/wk rent coming in as income, to help pay off the others..... Does this sound like the way to go..?

Any info or help is GREATLY appreciated, as I don't know who else to ask..?
Thanks heaps !

 

[duckster]

doesn't sound good

You are not getting money for nothing there is a cost but you may be being sold a lower overall interest rate through a refinance. You need to check if that is the case.

You refinance then you release 85k out of a loan you are ahead of in repayments.
was
IP#1 - owe $105K - value = $380k (rents at $300/wk)
IP#2 - owe $120k - value = $270k (rents at $250/wk)
IP#3 - owe $120k - value = $250k (rents at $220/wk)
IP#4 - owe $200k - value = $220k (rents at $250/wk)
Total debt is 545k k

refinance 85k is coming by increasing existing debt
IP#1 - owe $20K - value = $380k (rents at $300/wk)
IP#2 - owe $120k - value = $270k (rents at $250/wk)
IP#3 - owe $120k - value = $250k (rents at $220/wk)
IP#4 - owe $200k - value = $220k (rents at $250/wk)
extra debt $85k it comes from increasing existing loans
so Total Debt is now 545k

Your bank manager is probably trying to get you to secure one loan of 525k against (IP#2,IP#3 and IP#4) security. if you miss a payment or want to sell one of these properties it can cause you to lose a property or have trouble releasing the security to sell a property.
Advantage may be pushing the loan amount up to a level where a professional package can be used to lower the interest rate on a 525k loan and saving you interest costs when the refinance occurs.

 

[Rolf Latham]

Nice portfolio

Beofre you can determine what right for you in terms of strategy, where do you want to be in 5 to 10 years time ?

Confronting question, but very relevant is, will you die in your current PPOR ? or will upgrade at some time ?

ta
rolf

 

[rroodd]

Thanks guys.

I would dearly love to be dropping back to part-time/casual work, by 10-years time, thus freeing up a lot more 'family time'...

Rolf - yes, at some stage in that time, there would also be the likelyhood of a change of PPOR - although not for at least the next 5 years.
The extra cost of this relocation (over and above whatever we sell our current PPOR for at the time, is hard to say now....but we won't be moving to a 'palace' .. lol )

I'm thinking I should be dropping back to I/O loans on the first 3 IP loans (this latest (4th ) one i'm going I/O anyway..) and letting them sit where they are, at just over the 100k oweing, where they will be almost neutral geared..?..

Cheers

 

[Rolf Latham]

Hi

Sack your bank manager for a start......................sorry bout the harsh words, but while that person may be partly helpful for your incremental success, their thinking ( and lenders policy) may stop you from achieving far more with your current resources.

With that sort of portfolio and the clearly stated intent of buying another PPOR this is what we would recommend as basic and partially advanced strategy. BUT one cant use the below as general advice, one would need to seek specific advice to see if this woud be suitable for them, AND seek specific tax advice.

Althiugh you have indicated you may sell the current PPOR to part fund the next,many may decide to keep the old PPOR.

1. STOP paying any Principal ony loan
2. Set the loan term on all loans to a min of 5 years Interest Only
3. Get an offset account on the largest loan
4. If adventurous, get a LOC or 2 and capitalise the interest on some or all of your investment loans. What this means is you use less of your own cash for this and this cash starts to accumulate in the offset(s)
5. Buy your next PPOR with "CASH", while still having a reasonabel gearing against your investment Properties ( actually set an 80 % lend agansg the new PPOR, and park ALLyour cash in an offset against this, thus again future proofing your tax position if you should again upgrade.

Again, I repeat, dont try this at home without adult supervision. This strategy in the wrong hands may cause grief. Please seek specific advice.

ta
rolf

 

[srini]

Hi

Sack your bank manager for a start......................sorry bout the harsh words, but while that person may be partly helpful for your incremental success, their thinking ( and lenders policy) may stop you from achieving far more with your current resources.

Couldn't agree with Rolf more. Definitely fire your bank manager.

We have a similar structure.

IP #1, #2 - Interest only
PPOR - Interest only (soon to be IP #3)
new PPOR - Interest only

All cash parked in off-set account against PPOR (will move that to "new PPOR").

Having interest only loans helps with your cash flow. So, you chose when you want to pay principle if any.

Only thing I would add is, see if you can increase interest only period to 10 years. Some lenders offer this.

 

[Simon]

Me too. Don't do what your bank manager says.

Make all of the loans IO and pay your current P&I repayments into an offset account on your current PPOR.

When you do buy your long term PPOR then use this cash to borrow 80% (or more). But maintain the savings in the offset account as it gives you the best flexibility.

I can go into more detail if you wish.

Don't sell yourself short as being green. You have more property than most people here.

 

[rroodd]

Thanks again for the info and explanations everyone. Much appreciated.
I think I am slowly starting to learn whats going on..Slowly..

So at the end of the day, (ie. 10 or 15yrs time, when i'm 50 ), how will I be able to have an income from the properties, if they've all been IO loans..?
I assume the answer is to have bought 'a few more than I actually need', and sell them off to pay off the first lot..?

It just seems a bit scarey to me, to keep on buying more IP's, although I guess I never even imagined having this many so far, either...

Going IO would certainly free up some more cash flow for me...